We are vesting that great power in two bodies, both of which will be sub-committees of the court of the Bank of England. The Treasury Committee was concerned about that and suggested that the court was not fit for purpose when it came to scrutinising the work of the

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FPC and the decisions of the FPC and the PRA, and it suggested abolishing the court and replacing it with a supervisory board with a greater spread of technical expertise on monetary and fiscal policy. At the moment, the court—I do not wish to be rude or impolite—is a rag-bag of industrialists, trade unionists and consumer champions, most of whom, frankly, do not have the skill, expertise or background knowledge to judge whether the FPC and the PRA are making sensible decisions. That is why we need a supervisory board to replace the court.

As the Chancellor said in his opening speech, there will be a new oversight committee for the FPC and the PRA. However, that does not meet the concerns of the Treasury Committee, for one simple and stark reason. The terms of the oversight committee to which the Chancellor referred make it quite clear that it cannot pass judgment on, or conduct ex-post reviews of, the decisions that the FPC and PRA have made. All that the members of the oversight committee can do under the Bill is see that the FPC and PRA arrived at their decisions in a proper fashion. They cannot make a judgment on their merits. That point was returned to again and again in the evidence taken by the Joint Committee on the Bill and the Treasury Committee, and the Bill does not answer it.

The second point that I wish to raise is about the role of the premier Committee in Parliament, the Treasury Committee, which is charged on behalf of Parliament with scrutinising the new bodies, the FPC and the PRA. The Treasury Committee has made it quite clear that there should be a statutory responsibility for either the court, if it remains, or, as we would prefer, a new supervisory board, to respond to any request for information made by the Treasury Committee, on behalf of Parliament. The Bank’s record on responding to requests from the Treasury Committee is not bad, but it is not perfect. I adduce as evidence for my proposition the fact that at the end of last year the Governor—quite wrongly in our view—did not think it appropriate to produce the minutes of the court of the Bank of England for the Treasury Committee, to show us what it was saying and doing at the time of the RBS meltdown.

My third and final point relates to the composition of that terribly important body, the Financial Policy Committee. The Treasury Committee strongly recommended—and still recommends—that a better balance must be found between the internal and external members of the nine-person Financial Policy Committee. My Committee proposed that the ratio of internal to external members should change from 5:4, which is what the Bill says it should remain, to 4:5—in other words, that a majority on the Financial Policy Committee should be external members. Why? For one simple reason. One of the besetting sins of the regulatory regime and the regulators who worked in it up to and during the crisis was that they were subject to group-think. They were all reinforcing each other’s prejudices and established views. It was disastrous for UK regulatory management. My Committee believes that one way of countering that propensity towards group-think is to have externals who are not full-time executive members of the Bank of England, such as we have at the moment. Of the six professionals—so to speak—all of them except the chairman of the FCA are Bank of England officials. Many of us think that that is simply not a sustainable proposition.

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The Government have made concessions and done some thinking since the first publication of the Bill, as well as listening to the two Committees, which have made some powerful suggestions about the better accountability that the two powerful new bodies in the Bank of England must demonstrate to Parliament and the British people. Progress has been made, but there are three issues, which I have highlighted, that are still on the table. The Government have not taken them up, and the Treasury Committee insists that they need to be recognised in the new regime and new settlement. It is in that spirit that I make those points—speaking, I might add, for my Treasury Committee colleagues who are in the far east on an important fact-finding mission and who would make these points if they were here. Those points need addressing, and I am sure that in the Public Bill Committee they will be, but it is important that the record should show that the Treasury Committee is still not satisfied.

7.5 pm

Mr George Mudie (Leeds East) (Lab):
May I first align myself with the remarks that my right hon. Friend the Member for Newcastle upon Tyne East (Mr Brown) made about the Chairman of the Joint Committee on the Bill, the right hon. Member for Hitchin and Harpenden (Mr Lilley)? The fact that I was still on the Committee at the end of its sittings shows that he was indeed tolerant and patient. I would like also to put on record my admiration for, and thanks to, the Chairman of the Treasury Committee, who is in China at the moment. We have had an arduous 18 months on the Committee going through the regulations. The fact that there are three members of the Committee here today is nothing to do with our being unable to get on the plane to China; it is more that we are so dedicated to regulation that we chose to be here.

I want quickly to raise three matters. I welcome the Chancellor’s open-mindedness—it was not a U-turn; that was an unfair description—in accepting the point about secondary legislation being inappropriate for the macro-economic tools. I hope that he will show the same open-mindedness on the three matters that I will raise, because so far the Government have not accepted the Joint Committee’s or the Treasury Committee’s views on them.

The first issue is the objective of the Financial Policy Committee, which is to ensure the financial stability of the financial sector. One difficulty raised by many of the witnesses before the Treasury Committee and the Joint Committee was that no one can come up with a definition of “financial stability”. That clearly presents those responsible for oversight of the FPC with obvious difficulties. On what basis do they judge the committee’s activities and performance? Is the issue stability alone? As the Chancellor himself stated in evidence, we should not be seeking the “stability of the graveyard”. I think of the unfortunate individual in hospital who is seriously ill in the high-dependency unit, but whose relatives are assured that he is in a stable condition. Just as in that example, stability in economic terms does not equal a healthy economy.

Arising from that—and equally important—the relevant question for all sectors to emerge from our witnesses was: in exercising its power to seek financial stability in

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the financial sector, will the Financial Policy Committee ignore the effect that that might have on the other sectors, in the real economy? To be fair, the original suggestion that the Government advanced was that the Financial Policy Committee could not take decisions to achieve financial stability if it believed that those decisions risked medium to long-term economic growth. An interesting and important point is that it was originally left to the FPC to make that judgement itself, with no mechanism for the Chancellor to have his say. The negativity of that formulation led HSBC, the British Bankers Association and several other witnesses to the Joint Committee to suggest that the relevant clause be redrafted, to give the FPC a positive duty to support economic growth.

I would like to put on record what was said by Stuart Gulliver of HSBC and Bob Diamond, neither of whom would immediately be recognised as friends of mine, or otherwise. Stuart Gulliver said:

“the…Treasury should be setting out what the Government’s goals are for growth, employment and job creation and saying to the FPC, ‘Use your macro-prudential tools to ensure that you achieve the Treasury’s goals.’”

Just as interestingly, both he and Bob Diamond cited the experience of the Pacific economies that actively manage the flow of credit and even its sectoral allocation, using a variety of macro-prudential tools. The people in small businesses and medium-sized enterprises would be very interested in that. The Joint Committee agreed a recommendation that the Bill be redrafted so that, like the MPC, the FPC must have regard to the Government’s growth objectives and other economic objectives. The Government have responded to the Joint Committee’s points on other related items in this area, but have not responded in favour of the more positive and widely supported suggestion that the FPC should be given a brief to have regard to the Government’s growth and economic policies. That is a real worry, and I hope that the Government will approach it with an open mind in Committee.

Mr Ruffley:
I am following the hon. Gentleman’s argument closely. Does he agree that it is imperative for the Governor of the Bank of England to return to Parliament to explain in detail the indicators that he thinks should be used in the attempt to get a handle on the definition of financial stability, and that we need a full and frank debate on what those indicators should be?

Mr Mudie:
That is an important point. I think that it was Charles Goodhart who raised the question of indicators. They are certainly interesting, but on a wider scale, I think it more important to establish that, given that the Monetary Policy Committee is linked to a target of 2% inflation, the Financial Policy Committee should be linked to growth employment measures that ensure that there is no “safety low level” of stability, and be forced to have a look at the problems of the real world out there.

Steve Baker (Wycombe) (Con):
The hon. Gentleman’s speech seems to allude to a search for an equilibrium that never exists in the real world. Does he think that that disconnection between the reality of life as a dynamic process and the search for stability is at the heart of the inability to define financial sustainability?

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Mr Mudie:
I think that it is more an indication of the way in which the banks have moved away from the real world into the investment world, computer schemes, and making money by using money, rather than funding the small and medium-sized enterprises on which we depend for a rebalanced economy.

This is a very similar—Madam Deputy Speaker, I think that I have thrown away my speech. However, the second issue that I want to raise is that of accountability. I want to draw the Chancellor’s attention to the danger of giving great powers to unelected officials, which can have a significant effect. One of the witnesses drew a parallel with the responsibility given in the sphere of health to the National Institute for Health and Clinical Excellence. NICE determines the availability of drugs and treatment, and when a particular decision is made, elected politicians are under great pressure to reverse it. It does not wash with most constituents to tell them that the decision is one for the regulator. They may understand that politicians have given up the power, but they rarely accept that we do not retain the ability to alter a decision that is painful to them—and why should they?

That is very similar to what will happen when powers are given to the Bank of England and the Financial Policy Committee. The Chancellor is handing power to the Bank on matters that will inevitably extend beyond the financial sector to the real economy. One example is interpretation of the financial stability objective. The Chancellor is given the opportunity to set an annual remit for the FPC, but to ensure the Bank’s independence, the Bill accepts that the FPC may refuse to accept the Chancellor’s remit. The Joint Committee recommended that the Treasury, not the Financial Policy Committee, should have the final say on the interpretation of the remit. It did suggest, however, that the FPC should make public its objections to the annual remit, and should alert the Treasury Committee. Giving evidence to the Joint Committee, Lord Burns said:

“if there is any part of this set of proposals that concerns me, it is probably to do with the governance of the FPC in relation both to its accountability to Parliament through the Treasury and the extent to which it can be defined as ‘independent’.”

That is a stark reminder of how much is being conceded by the Chancellor. His annual remit on how the Financial Policy Committee should interpret and pursue the financial stability objective can be disregarded by the committee. To illustrate the importance of that, I cannot do better than to read out the words of the Joint Committee:

“The tools available to the FPC could allow a reversion to a level of central intervention in credit flows that has not been practised in the UK since the period of ‘Competition and Credit Control’ in the early 1970s. Such interventions would, for example, often affect mortgage availability and loans to households and companies. Given the wide range of possible interventions, and absence of any quantifiable target for financial stability corresponding to the inflation target for monetary stability, the FPC’s decisions will be more politically controversial than those of the MPC.”

Bizarrely, the Government have not accepted that when there is a difference, the FPC must accept the will of the elected Government, but have accepted that the FPC may make its defiance public. The Chancellor is not only allowing the FPC to defy him, but encouraging those unelected officials to tell the world that they have done so. That strikes me as a very strange working method.

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The third issue that I wish to raise concerns a different aspect of a matter that has been discussed by those on the Front Benches. Who is in charge in a crisis? That is the question that was asked by Lord McFall at the time of the Northern Rock crisis. It shook the regulators, and it voiced the thoughts of the general public. There is a genuine wish to prevent such a situation from arising again. The accepted answer is that the Chancellor is responsible, and that therefore he should be in charge when there is a crisis. That seems sensible and straightforward to most people, but not to the territorially sensitive Bank of England. Nigel Lawson heard about the Johnson Matthey crisis, and the need for him to commit Government money, on the morning when it broke. He was understandably upset. Before the resort of using public money is accepted, the Chancellor should be made aware of the difficulties.

I shall now depart from my script, because I have only a minute left. We in the Joint Committee and in the Treasury Committee were trying to be helpful to the Chancellor. We made a recommendation, which the Chancellor accepted, that when a crisis arose or he was warned of one, he should take direct command. The memorandum of understanding—this is a different point from the one raised by the shadow Chancellor—has been nicely arranged, by the Bank, I presume, to ensure that even in those circumstances he does not have direct control. The Bank remains operationally in control, and the Chancellor can speak only about matters relating to the public funds to be used to deal with the crisis. We wanted to give him the opportunity to make a full range of decisions to avoid the use of public funds, and I hope that the Minister will consider that.

7.17 pm

Stephen Gilbert (St Austell and Newquay) (LD):
It is a pleasure to follow the eloquent contribution of the hon. Member for Leeds East (Mr Mudie). He declared to the House that he had dropped his speech, but I do not think that anyone noticed. I intend, for all our sakes, to hold on to my own speech.

I want to raise three issues. First, I want to speak about the enhancement of consumer protection that the Bill provides, and I hope that my comments about that will be echoed by the hon. Member for Walthamstow (Stella Creasy). Secondly, I want to discuss the relationship between the FCA and the PRA. Thirdly, I want to develop a theme introduced by my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley): the representation of British interests overseas.

Let me say in passing, however, that I share the concerns of other hon. Members about the oversight of the new macro-prudential powers which may need to be handed to the Bank of England, and which I believe could fundamentally alter vast swathes of the UK economy. It has already been mentioned that the ratio of mortgage lending may be one of the macro-prudential powers that the Bank of England wants to take on. It may be necessary to regulate an individual’s debt levels, and to regulate the debt exposure of small and medium-sized enterprises. All that needs proper parliamentary scrutiny, and I was pleased with the Chancellor’s response to my intervention on that point.

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Let me begin with consumer protection. As we know, the Bill will establish a new code of conduct business regulator, the Financial Conduct Authority, which aims to protect consumers, promote, competition, and ensure that there is integrity in markets. Many consumer groups, including Citizens Advice and Shelter, have welcomed the FCA’s proposed objective of promoting competition in the interests of consumers. It is welcome that the FCA will have additional tools to deal with business conduct that is causing, or is likely to cause, consumer harm, to take action on products, to promote greater regulatory transparency, to tackle misleading financial promotions and to enforce the requirement to satisfy the regulator that a business model is suitable.

Lorely Burt (Solihull) (LD):
Does my hon. Friend agree that short-term consumer credit, payday lenders and the managing of consumer debt companies will now be much more strongly regulated, as has been called for by Members on both sides of the House?

Stephen Gilbert:
My hon. Friend is quite right; that is a welcome step forward, although there are some bits that still need to be tidied up. I shall come to those later.

It is particularly welcome that the FCA will have a super-complaint power. This will allow Citizens Advice and other consumer bodies to use their evidence of widespread consumer harm to make complaints on behalf of all consumers, including those who might not know how to complain, and those who do not understand that their rights have been infringed. To make this new era of consumer protection effective, however, the Bill should require the FCA to respond quickly and effectively to super-complaints concerning widespread consumer harm, and I ask the Minister to consider what improvements could be made to the Bill in that regard when it goes into Committee.

As we know, the Bill sets out a framework for moving the regulation of consumer credit lending to the FCA. That, too, is welcome. But it is vital that not only lenders but debt collectors, brokers, debt managers and retail lenders that sell insurance products are regulated by a single, strong regulator. I believe that the responsibility for all that regulation should go to the FCA. In recent years, we have seen a succession of widespread consumer problems with financial products and services, including the mis-selling of payment protection insurance, poor lending and arrears collection practices in sub-prime mortgage markets, unacceptable debt collection practices by major credit providers, irresponsible lending of unsecured credit, and the ongoing saga of bank charges. It is clear that a change in the way in which consumer credit is regulated is necessary to protect consumers better in the future. I am looking at the hon. Member for Walthamstow as I say that.

Under the Consumer Credit Act 2006, the Office of Fair Trading has too little power or policy autonomy to respond quickly to emerging consumer harm, particularly when it concerns new products, services and business practices. That makes it easy for firms engaged in bad practices to target vulnerable consumers. It also undermines attempts by the sector to police itself, and makes the task of regulatory enforcement much harder. The level of financial penalties is also too low to act as a deterrent.

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The OFT does not have the power or resources proactively to supervise regulated firms, or to identify and stop bad practice at an early stage. OFT guidance does not have the quality of rules, the breach of which could lead to a sanction, so enforcement is also slow. In respect of payday lending problems, for example, the OFT appears unable to make a specific rule limiting the number of times a loan is rolled over, or binding provisions on how a payday loan firm should ensure that it is lending responsibly, or to require a firm to deal with borrowers in financial difficulty in a specific way.

The Consumer Credit Act conduct regime is highly enforcement focused. There are few powers to pre-empt causes of consumer harm, or even to require firms to compensate consumers who have suffered harm. I think that all Members would agree that the consumer credit market needs a regulator that can regulate products and prevent consumer harm before it becomes widespread.

Stephen Lloyd (Eastbourne) (LD):
I strongly agree with the direction of travel that my hon. Friend is taking, but does he acknowledge that there is a slightly slanted argument on this matter, because the APR on bank overdrafts that have not been arranged is often far higher than that charged by the better known and perhaps more reputable payday loan companies?

Stephen Gilbert:
I am grateful to my hon. Friend for making that point. I believe that all financial services should be underpinned by two principles: one is transparency, in that the consumer needs to know what they are getting; the other is that interest needs to be proportional to the length of time and the amount borrowed. I am sure that the record will reflect what my hon. Friend has added to the debate.

Transferring responsibility for consumer credit regulation to the FCA will also have the advantage of providing one umbrella regulator for credit, insurance, broking and debt management. It is vital that we do not allow a two-tier system to develop, with mainstream credit being regulated through the FCA and a reduced number of licensable firms being regulated under the CCA by a small successor to the OFT with lesser powers and diminishing resources. I am therefore pleased to see the direction of travel that the Government are taking on this matter.

My second point relates to the Prudential Regulatory Authority and the FCA. It seems anomalous to give the PRA a veto over the FCA. This could have the effect of putting the prudential strength of banks above consumer protection. The Bill might allow the PRA to veto the FCA taking action against a party for market abuse. If the PRA were to veto the FCA’s taking action to protect consumers, it would have to tell the Treasury that it had done so, but it could also prevent the Treasury from informing Parliament. In my view, that provision needs to be reversed.

Turning to the need for the United Kingdom to maintain effective representation abroad, it is clear that the proposed new supervisory bodies will need to co-ordinate in order effectively to represent our national interests at European and international levels, including with the new European supervisory authorities. The financial services industry, the Government and the UK regulatory authorities all have an important role to play in representing the UK in international discussions on financial regulation.

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The Financial Services Authority and other UK regulatory bodies have a strong record of constructive engagement with, and influence in, European and other international bodies. Indeed, to give the House just two examples, the former head of the FSA’s international division now leads the European Securities and Markets Authority, and the Governor of the Bank of England has a leading role on the European Systemic Risk Board and on the governing committees of the Bank for International Settlements. The International Monetary Fund’s recent report on the future of regulation in the UK has also said that the effective international co-ordination of the UK’s position is important.

I therefore welcome the Government’s recent statement that they accept the case for a committee on international co-ordination, and I want to underline to the Minister the need to get that right. There will not be a perfect match between the scope of the responsibilities of the new UK bodies and those of European and other international groups, so there is a requirement for co-ordination between different UK bodies to represent the British interest effectively. The proposed measures in the Bill will oblige the new UK regulatory bodies—Her Majesty’s Treasury, the Bank of England, the PRA and the FCA—to sign a statutory memorandum of understanding and to work together.

I believe that TheCityUK was right to say that effective international co-ordination is so important to the broader UK economy, as well as to the financial sector, that a dedicated group or committee should be appointed to give sufficient priority, resources and responsibility to mobilising the UK’s European and international representation. It proposes the formation of an international co-ordination committee with specific responsibility for leading the UK’s representation on European and international committees. I commend that approach to the House.

I welcome the Bill, but I ask Ministers to look again at the balance of power between the FCA and the PRA, at the inclusion of all CCA activities within the remit of the FCA, and, above all, at the need to ensure that the United Kingdom retains a strong and coherent voice externally.

7.28 pm

Stella Creasy (Walthamstow) (Lab/Co-op):
This is the third time that we on this side of the House have proposed legislative action on the high-cost credit market in the UK. As Mae West said:

“I’ll try anything once, twice if I like it, three times to make sure.”

I can tell the House that we are absolutely committed to the argument that something needs to change drastically in our consumer credit markets. This Bill offers the potential to address some of those concerns. We have had a positive debate today about some of the large-scale problems in our financial markets, but I want to set out the other picture. I shall talk about those people at the other end of our financial markets, the people who are called the “under-banked”. There is now irrefutable evidence that millions of people in this country are unable to access credit in a manner that is positive and constructive to their financial health. We should consider that one in six of us is now what are called “zombie debtors”—paying off the interest on our debts, not the capital.

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A perfect storm has hit UK consumers in the last couple of years as pay freezes, rises in unemployment, rises in the cost of living and a lack of regulation of the consumer credit market has made us a fertile territory for the high-cost credit industry. It is not by coincidence that these companies have flourished in Britain in the last couple of years, as there has been a 200% increase in the numbers of people borrowing from payday loan companies and a similar increase in the amount of money they are making from British consumers in the last 18 months alone.

With a mind to what we could do to the Financial Services Bill, let me set out what the prices are and what they mean to British consumers. Many Members will be familiar with my own personal travails with a company called Wonga whose rates are 4,214% representative APR in a year. Some may be familiar with QuickQuid whose rates are 1,734% representative APR, while some may have come across the Money Shop in their constituencies, with a mere 219% representative APR. Some may be familiar with some of the newer players in the market—for example, Ferratum, a major European payday loan company, which has a mere 3,113% APR. Then there is Peachy Loans, which will lend people £100 at a time, with £15 interest every 10 days. That works out at a representative APR of 16,381% every year. This is not to mention companies like Borrow, recently advertising themselves on the radio and TV, which encourages people to borrow £10,000 a year at an APR of 68%.

Before we discuss any legislation, it is worth thinking about this industry and how it operates. It wants to paint itself as the new industry, the new form of financial credit that Britons are crying out for, that the Facebook generation wants, that is online, quick, easy and consumable. There is another side to this story, however, as many will have seen the people who are struggling because of the toxicities in this market. When we know that 30% of payday loans are taken out to pay off other payday loans, that should tell us that something is going drastically wrong that needs addressing.

Payplan, a debt charity company, says that 46% of its clients had six or more payday loans in the last year alone. This is not a short-term temporary measure; this is a way of life for millions of people in our country nowadays. More than half the people going to Payplan for debt advice owed more than £500 to these companies, and 61% had more than one at a time. Most crucially, 86% of its clients were using the loans for basics—food, transport and the basic costs of everyday living, not luxuries. This is not a market that is working for British consumers; it is not an industry that wants to lend people money and have them pay it off within a reasonable length of time. It is an industry that wants to lend to people, to keep lending to them and to keep taking money from them, drips at a time, raising the interest rate as it goes along, and adding money to the bill every single month.

The rates in themselves mean that debt is more likely. That is the challenge we have to address with our consumer credit regulations. We are talking about people who are short of cash now. They are not using it as a temporary stop-gap; they are struggling in Britain today. We need to be aware that 7 million Britons last year put their mortgages on their credit cards and 1 million people used payday loans to pay their mortgages. That

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is the sort of challenge we have to address. It is also the opportunity we have with the new Financial Conduct Authority.

I welcome the fact that Ministers have listened to the advice I gave them on 16 June last year when I suggested that the FCA could indeed take over this role and look at this industry. I welcome that, as I say, but I know there are issues over how the FCA should deal with the promotion of competition and over the real powers that the FCA needs to address these companies and to regulate this market. Indeed, I note that other consumer organisations such as Consumer Focus, Citizens Advice and the Financial Services Consumer Panel have written to the Minister asking for the FCA to have specific powers for product intervention. This must go beyond the point, which I recognise the hon. Member for St Austell and Newquay (Stephen Gilbert) mentioned, about the paucity of the response that the Office of Fair Trading has been able to make to these companies. I know all too well myself from when I tried to get the OFT to act on companies that did not display their APR how difficult it is to make progress. This goes beyond advertising and people knowing what the price is. It is about the fact that the prices reflected in the APRs I mentioned show that this is not a free market and that competition in itself is unable in this market to ensure that consumers are not put in detriment.

I know that many Members agree that things could be done, so let us give the FCA the power to intervene to make sure that there is competition and to use price as an indicator of competition. Let us give the FCA the real power it needs finally to address this country’s legal loan sharking. I agree with the hon. Member for Eastbourne (Stephen Lloyd) that there is a challenge with unauthorised overdrafts and credit cards, so let us use the FCA finally to make good on this Government’s broken promise to tackle the exorbitant rates on credit cards and unauthorised overdraft charges and cap those prices.

John Hemming (Birmingham, Yardley) (LD):
I share the hon. Lady’s concern about the very high levels of interest rates charged on certain debts. Does she share my concern about the effect of continual late payment fees, which have exactly the same effect?

Stella Creasy:
Yes, I agree, and I hope that Government Members will join me in condemning those banks and credit card companies that, at the very time when millions of British consumers are struggling, are ratcheting up their interest rates, following the lack of regulation on excessive interest rates on our credit cards.

John Hemming rose—

Stella Creasy:
I hope the hon. Gentleman is on his feet to agree with me that this must be stopped.

John Hemming:
I wanted to make reference to my entry in the register, as I have certain banking shares.

Stella Creasy:
I hope that the hon. Gentleman will use the fact that he has shares to make representations to his bank about the consumer credit market in the UK.

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The consequence of doing nothing about this industry and doing nothing about how British families are being made to struggle because of the cost of credit are far too great to see. Frankly, it is not good enough for the Chancellor and the Minister to say, “Well, we have to wait until we see the research from BIS.” We have been waiting years—yes, years—for action on this issue since it was first put to Ministers.

David Mowat (Warrington South) (Con):
I am following the hon. Lady’s argument closely, and many Government Members are equally concerned about these practices, but will she clarify what rate of APR she thinks should be the maximum for a loan of, say, one week?

Stella Creasy:
I have answered this question in previous debates. I do not think that we should set a single rate of APR and I do not think we should have an interest rate cap: I believe we should have a total cost cap. In the absence of the Government making progress on such a cap, however, I view the FCA as offering an opportunity to start the more effective regulation of this industry. I hope that the hon. Gentleman would agree that the opportunity to have the industry and consumers setting rates and clarifying what is excessive and what counts as consumer detriment in the listing of these products represents a way forward. That is the argument of Labour Members, and we shall seek to table amendments on that basis. It is no wonder that the number of complaints about these companies and these loans is sky-rocketing in the UK.

Alun Cairns:
Will the hon. Lady give way?

Stella Creasy:
I am sorry, but I will not, as I do not have much time left and I have already taken some interventions.

Between October and December last year, there was a 25% increase in the number of people complaining about these companies, and three quarters of those complaints were upheld by the financial services ombudsman. Demand for these products will only get stronger. Two in five people are expecting a pay freeze this year, and one in five expect to lose their job. Inflation rates might slow, but that will only slow the pace of the cost of living, especially in the capital city. Six million people are already considered financially fragile; if one more bill goes up—their mortgage, transport costs or even their food bills—they will be pushed further and further into debt. With banks not lending to these people, it is these legal loan sharks who will pick up the pieces.

We should reflect on the fact that the one industry growing in this country is these legal loan sharks. Cash Converters proudly says it is going to open another 40 new shops—at 1,413% APR; while Albemarle is opening 300 new shops, charging 853% APR. This is also a serious issue for our economy. If millions of families have thousands of pounds worth of debt that they cannot escape, it is clearly going to impact on consumer confidence. This will be the new economic crisis that will come to Britain in the years to come if we do not deal with this problem, as we have concentrations of communities with thousands of pounds of debt hanging around their necks, limiting the choices they can make for their futures and limiting the kind of lives they can

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lead. The failure to tackle these issues will leave millions of people with unmanageable debt, yet we have an opportunity to make progress through this Bill.

This problem is not going to go away. It is right to look at the industry and for consumers to be involved in setting the rates and determining what is consumer detriment. Let me tell the Minister that the public clearly want action on legal loan sharks. His own Back Benchers want action on them. I welcome the conversion of Government Members to this cause. I just hope that it is a conversion that will continue all the way through to voting in favour of our amendments. Even the industry wants action. It does not want the current uncertainty.

My simple question to Ministers, if they will not accept our amendments, will not send out the message and will not finally tackle legal loan sharking is this: how much worse does it have to get for the people affected in our communities? We know that 4 million people in Britain are already borrowing from these companies, and there could be as many as 10 million if we do not deal with these problems within the next year. That will be 10 million people stuck in a cycle of toxic debt that will damage them and their families for years to come.

I therefore ask the Minister to take on board the suggested amendments and to take account of the desire of Members on both sides of the House for action on legal loan sharking. Let us finally make the third time a charm.

Several hon. Membersrose—

Madam Deputy Speaker (Dawn Primarolo):
Order. Before I call the next speaker, we moved rather swiftly on from a recent intervention and I wonder whether, for the sake of clarity and accuracy of the record, the hon. Member for Birmingham, Yardley (John Hemming) might like to make his final point again.

John Hemming:
Yes, I wanted to refer the House to my declaration of interests and the fact that I hold certain bank shares, which will obviously be affected by limits on sums that can be claimed per letter.

7.40 pm

Matthew Hancock (West Suffolk) (Con):
It is a pleasure to follow the hon. Member for Walthamstow (Stella Creasy). She speaks with passion and determination about consumer credit issues.

We have heard much about consumer credit and accountability, and, indeed, about culpability for what went wrong. Those are important questions, but I want to concentrate on the substance of the Bill and its impact on financial and economic stability. We did not hear much from the Opposition Front-Bench spokesperson about the question of substance, but I think this Bill is one of the Government’s most important pieces of legislation so far. It is an attempt to draw the right lessons from the economic crisis, and to set out a regulatory structure that will last for years to come. I am therefore very pleased that the debate has taken place almost entirely—almost, I repeat—in a spirit of constructive criticism.

It is said that the next financial crisis occurs when the last person to witness the previous crash retires. I hope that that will be a long time from now—and I also hope

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that that last person may be sitting here in the Chamber today. It is important that there is a long time frame, because the Bill must be right not only when memory of the recent crash is vivid, but when the boom is booming again and once more people are saying, “This time it’s different.” Our aim must be to embed a culture of responsibility into the big balance-sheet banks, while also encouraging and supporting the broad multitude of smaller, energetic, innovating, enterprising, exporting, wealth-producing, vitality-bringing, tax-paying City firms and companies that are not underwritten by the taxpayer and that make up the vast majority of firms in the City—and that ensure that our financial services industry leads the world.

Before turning to the substance of the Bill, however, I want to deal with the two questions that have dominated the media debate: accountability and culpability. To those concerned about accountability, I add only the following few comments to the long exchanges that have already taken place. The Bill represents an important step forward. At present, the Governor of the Bank of England reigns imperial on questions of financial stability. Executive action is vested in him and him alone. By creating the Financial Policy Committee, the Bill ensures that the Governor will be the chairman of a powerful committee, but instead of his being imperial, a committee decision will carry the day.

On the question of culpability, I do not know whether the Opposition admitted that they got things wrong, but it falls to us to learn the lessons from the failures, as well as the successes, of the past. My central argument on this question is as follows. Our financial system is complex, ever-changing and interconnected. We must therefore treat it as a system and understand the human behaviour of the people in it, rather than treat it like a textbook.

First, instead of segregating the regulation of the banks from the management of the economy as a whole, as the tripartite system tried to do, we must treat them as one part of the whole system. The attempt to turn the Bank of England into a monetary authority and to leave the FSA as a micro-regulator was bound to fail because no one was in charge of the size of bank balance sheets not only in the bust—as we well know—but in the boom, too. Monetary policy works through the banking system. Banks create money and transmit interest rates to the wider economy. As finance and money are deeply intertwined, their regulation must also be intertwined. That is the first lesson to be learned from the crisis, and this Bill addresses that point.

The second lesson is not about who regulates; it is about how they regulate. The debate about whether there was too much or too little regulation is sterile and defies the facts. Instead, we should be seeking the right regulation. Between 2001 and 2008 the number of pages in the Financial Services Authority rulebook increased from 2,700 to 9,300, yet, as we know from the report into the failure of RBS, not a single FSA rule was broken at RBS. There are some vivid examples of the FSA’s box-ticking mentality. In 2006 the FSA noticed that certain financial institutions were conducting biased stress tests on their balance sheet strength. In 2004 the FSA identified Fred Goodwin’s management style as a risk for RBS, yet nothing was done. No one was held to account. The FSA also failed to regulate balance sheets or check that business models were sustainable. There

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were 9,000 pages of rules, therefore, but there was no view on the sustainability of the business models of banks. In fact, FSA chiefs hardly ever met senior management. The FSA had meetings with Northern Rock’s senior management eight times in the two years before the crash. Two of those interviews were conducted by phone, while five of them took place on the same day. In 2007 when Northern Rock went bust, it was on the at-risk register but the next set of meetings between its senior management and the FSA was scheduled for two years later, in 2009. The pendulum between sticking to the rulebook and allowing the authorities to exercise discretion had swung to the extreme end of using the rulebook and leaving no room for judgment.

Stephen Phillips (Sleaford and North Hykeham) (Con):
My hon. Friend is making a powerful case. Does he agree that a key point is that flexibility is required for effective regulation of the financial services sector, and that one of the problems with the previous regulatory system was that the monolith that was the FSA simply imposed more and more rules without there being the flexibility to be able to tailor the rules to the circumstances?

Matthew Hancock:
That is absolutely right, and I should also pay tribute to my hon. and learned Friend’s profession outside this House, because, as in the common law, every successful system of oversight that has stood the test of time allows room for both rules and judgment. The common law is an example of a system that has built up over time and that understands the complexities of human behaviour. It has strict rules in some regards, but it also allows the exercise of judgment in order to be able to adapt to modernity and circumstances. If we move entirely towards rules and away from the exercise of any judgment, we take away that ability to adapt.

Steve Baker:
My hon. Friend makes an interesting point in comparing the approach under discussion to the common law. Does he agree that a key difference is that whereas in the common law anybody can look at previous judgments and know how the law will respond to their behaviour today, under this proposal to have flexible forward-looking, judgment-based regulation we cannot necessarily be sure today how the state will treat our current actions at some point in the future?

Matthew Hancock:
It would be better if we had an embedded and long-standing system in which there were those precedents, but as we do not have about 800 years to put it in place it is better to have a forward-looking system. If my hon. Friend has a suggestion as to how we can use precedent built up over time, given that we are starting from a system that catastrophically failed, I would be very interested to hear it.

Steve Baker:
I hope that my hon. Friend will stay for my speech.

Matthew Hancock:
As I said, this pendulum swung too far, but why do we need to allow the authorities to exercise discretion? It is because the world we face is as we find it, not as it is written in the rulebook. Indeed, the very complexity of the system calls for simple rules, because the more complex the rules applied to a complex

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system, the more likely somebody is to try to game it and, therefore, the more complex the set of rules that will need to be imposed again on the system to try to account for that behaviour. We see the same thing in respect of other areas of Government policy, not least the tax system, where complexity has led to avoidance activity, which has led in turn to complexity, and so we now have the longest tax code in the world. This attitude towards regulation and oversight makes no sense in the modern world of complexity. Complex systems need simple rules.

Complexity also adds cost to businesses not targeted initially. Worse still, the complexity leads to a moral abdication, because the rules become a substitute for personal responsibility. Just as we need to allow for the exercise of discretion by regulators, we also need, within a system that promotes responsibility, to allow for the discretion of management. That is why I have concluded that we need to ensure, especially in such a high-paying business, that the sanctions for failure and for irresponsibility are strong. It is not a good enough sanction for someone simply to lose their job in an industry where it is easy to move into another one.

In the first instance, we need to move to a system where the debarring of directors is made easier, not least because when a bank is rescued it technically does not go through the current debarring rules. The FSA is right to regulate pay and introduce claw-back, but we also need, in extremis, to introduce a measure to ensure that for recklessness at the helm of a systemically important bank there is a stronger and, if necessary, criminal sanction. I hope that such a measure would never be used but, as with other areas of life where these measures are hardly ever used, it greatly concentrates the mind to know that a deep sanction exists for reckless and deeply irresponsible negligence. I hope that such a measure would be a check on hubris and would last the test of time so that it would be in existence next time there is a boom and the associated hubris.

I hope that that change, the changes in this Bill and other changes will allow those of us who support the free market, enterprise and innovation to support, unabashedly and with enthusiasm, the wealth creators, who make our prosperity possible.

7.53 pm

Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op):
I wish to make a relatively brief contribution. I do so without the degree of expertise that has been exhibited by a number of right hon. and hon. Members who have spoken, particularly those who have served on the Joint Committee and on the Treasury Committee. I know that they have examined the detail of this Bill and have taken evidence on it over a period of time. My expertise on and knowledge of financial services has largely come about as a result of issues raised by constituents since my election to this House. That is why I wish to spend a little time discussing part 2 of the Bill, which creates the Financial Conduct Authority, which we have heard referred to as one of the successor bodies to the Financial Services Authority, and part 5, which deals with independent inquiries into investment schemes, among other things.

I come to those parts of the Bill as a result of what I suspect will become known soon enough as the latest in a long line of mis-selling episodes, to which the

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Chancellor and shadow Chancellor referred. My right hon. Friend reminded the House that there have been a number of these episodes over the course of 30 years and under various different regulatory regimes and set-ups. The issue that I refer to is the collapse of the Arch Cru investment vehicle in 2009 and the interests of the 20,000 individuals who have, almost certainly, been adversely affected by it. As many hon. Members will be aware, Arch Cru was established in 2006 and was sold as a vehicle to provide low-risk, cautiously managed funds that were sold through independent financial advisers and, like all investment funds in the UK, were regulated by the FSA. The authorised corporate director was Capita Financial Managers, part of the Capita group, and the two depositories of the fund were the Bank of New York Mellon and HSBC, whose activities were, again, regulated by the FSA. Many of those who invested in Arch Cru did so on the basis that it was managed cautiously, and the use of those household names gave people comfort that the regulator was overseeing those bodies and that people’s money was indeed being invested cautiously and wisely.

As many hon. Members will know, the fund was suspended in March 2009. At the time, it was worth £363 million but by March 2011 its value was estimated at £148.8 million, which means that many people have suffered losses as a result. Far from being cautiously managed, funds were invested in cells registered in Guernsey in a cavalier manner. Investments were made in off-plan property, in real estate in Dubai, and in Greek shipping and ferries. It remains highly dubious as to what level of recompense investors are likely to receive.

The collapse of a supposedly low-risk collective investment scheme such as Arch Cru has caused a high degree of anxiety. Although we accept that no regulatory system can provide absolute protection, the failures of the FSA, in many respects, in this case mean that it is important that the measures being put in place give consumers the right amount of protection. That is why I particularly welcome clauses 64 to 68, which deal with independent inquiries into regulatory failures in respect of collective investment schemes. However, clause 64(5) has the effect of meaning that events occurring before 1 December 2011 will not be subject to the power of inquiry, and Arch Cru’s collapse occurred well before that cut-off date. The Government have the power under section 14 of the Financial Services and Markets Act 2000 to institute an inquiry, and I hope that they will still make use of that power.

Clause 67 deals with the conclusion of an inquiry, noting that the person holding that inquiry must

“make a written report to the Treasury”.

The existing legislation contains a provision stating that the Treasury may publish the whole or any part of a report and, should it decide to do so, the report should be laid before Parliament. However, a similar provision appears to be missing from the Bill, so perhaps the Financial Secretary will enlighten the House on whether I have missed it or whether we will need to make an amendment in Committee to ensure that that degree of transparency is in place for such inquiries.

If we are to minimise the chances of another episode such as the Arch Cru collapse happening again, the people who invest their retirement nest eggs on the basis of being told that a fund is cautiously invested need to be adequately protected by the regulatory regime. There

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should be some governance over the terms used to describe investment vehicles, especially where, as in this case, the reality turns out to be very different from the description.

Alun Cairns:
I pay tribute to the work that the hon. Gentleman has done on Arch Cru. Does he share my concern that the risk category of any financial product is assessed by the Investment Managers Association and that there is no regulatory framework or matrix by which such an organisation conducts its work on assessing the risk of a product?

Tom Greatrex:
I thank the hon. Gentleman for his intervention. I do not wish it to appear as if we are just congratulating each other, but I want to place on the record my appreciation of all the work that he has done on Arch Cru as co-chair of the all-party group on Arch Cru. It is my pleasure to co-chair that group with him and he makes an important and significant point.

As the Bill goes through Committee, we need to consider that issue in detail as it relates to the set-up of the FCA, to ensure that we are never again in a position in which descriptors with no value are attached to investment opportunities, almost as a marketing exercise, with nothing behind them. I hope that the Financial Secretary hears the hon. Gentleman’s important point, and that we can return to it in more detail.

One way in which to prevent a repeat of the experience is fully to learn the lessons of the Arch Cru collapse, and to ensure that, as a result, the consumer is protected by a more robust regime. The Financial Secretary will no doubt recall that in a Westminster Hall debate on Arch Cru last October, many Members on both sides of the House asked the Government to instigate a section 14 inquiry. The Financial Secretary replied that he did not think such an inquiry appropriate at that point and he continued:

“The powers are available where it appears that significant damage has been done to the interests of consumers that might not have occurred but for a serious failure of regulation. It is worth pointing out that the power has never been used.”—[Official Report, 19 October 2011; Vol. 533, c. 285WH.]

First, I am not quite as convinced as the Financial Secretary is that the fact that the power has never been used means that it should not be used. Secondly, to my mind, Arch Cru is an example of regulatory failure. The FSA failed properly to regulate the fund, and let down my constituents and thousands of others across the country by not stepping in earlier. The FSA was statutorily responsible for regulating Capita Financial Managers, which was the authorised corporate director for Arch Cru, yet Capita failed to see what was going on until it was far too late.

As the intervention by the hon. Member for Vale of Glamorgan (Alun Cairns) illustrated, there is cross-party consensus on the issue, and the all-party group extends across the whole House, with members from every party other than the Scottish National party—that might be pertinent. When answering questions in December, the Prime Minister was receptive to the idea of considering what more the Government could do to address this important issue. One course of action could, and I would argue should, be to establish a section 14 inquiry, the findings of which could be used to inform a detailed discussion of the proposed FCA, and to ensure that the

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body is established with the resources, expertise and powers necessary to minimise the opportunity of anything like the Arch Cru failure happening again.

Even at this late stage, I ask Ministers—the Economic Secretary is now on the Front Bench and might be less familiar with the issue than the Financial Secretary, who was there when I started speaking—to reconsider the position on a section 14 inquiry, so that this part of the Bill can be as robust as possible. When the current regulator admits that it did not know what was happening, because of the structure of an investment vehicle and the nature of some of the investments in Guernsey and elsewhere, in my mind it becomes the responsibility of the Government to minimise the risks of the same thing happening again. The Government have an opportunity, as do we, through the Bill, to ensure that the successor body is better placed to ensure such a result.

It is sometimes easy, when getting into the weeds of an issue such as Arch Cru—as I and others have done over recent months—to forget that ultimately this is about people. It is about my constituents and others who deserve the right consumer protection, and we must be confident that in dealing with the consumer aspects of regulation, the successor body does not fail in the way its predecessor did. To ensure that, we need to know what did not work under that predecessor regime, so that there is confidence in the successor body and people are protected in the right way. That is why it is still relevant and important that the Government consider a section 14 inquiry into Arch Cru under the current legislation, and I hope that Treasury Ministers understand that this point is being made in the best interests of scrutiny, of effective regulation and of the consumers who expect, and deserve, to be protected when purchasing financial services products.

8.4 pm

Mark Garnier (Wyre Forest) (Con):
It is a great pleasure to speak in this debate, partly because in a previous existence I spent a number of years on two occasions as a compliance officer under three different regulatory regimes, and also because I am the third of the three Treasury Committee musketeers who did not go on the trip to Shanghai and who were left behind to hold the fort.

What is abundantly clear—I do not need to repeat it—is the utter uselessness of the current regulatory regime and how the FSA operates. That can be illustrated by the exchange of words between my right hon. Friend the Chancellor of the Exchequer and the shadow Chancellor about the operation of the day-to-day running of the tripartite regime. Only last week we heard from Hector Sants, the chief executive officer of the FSA, that while he was a managing director of wholesale and institutional markets at the FSA, he had no discussions whatever about the Royal Bank of Scotland’s investment bank. Lord Turner went on to add that the FSA was singularly incapable of meeting the expectations placed on it given the breadth of its regulatory responsibility. Given that, the need for a new regime is unquestionable. I am certainly satisfied, in the broadest sense, that the Bill makes great progress, not least in response to Lord Turner’s comments. We are dividing up regulation between the Financial Conduct Authority, which will be charged

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with protecting the consumer, the Prudential Regulation Authority, which will look after the nuts and bolts of the system, and the Financial Policy Committee, which has been set up to look at systemic risks.

As the third member of the Treasury Committee to speak in this debate, I fear I might repeat some of the points that have been made. If I do so, it will be to reinforce those points. One thing that has not been talked about, however, is the speed and complexity of the Bill. It is complex and has very far-reaching implications for the long-term security of our financial system as well as for the competitiveness of this country. It is worth remembering that financial services employ more than 1 million people in the UK and raise more than £50 billion a year in tax revenue.

The Bill seeks to amend three previous Acts. The Treasury Committee recommended that the Government start afresh with a new Bill dedicated to addressing all the myriad points discussed since the financial crisis and, indeed, before. The Governor of the Bank of England agrees; he said to a meeting of the Committee last year that

“our first preference had been to have a clean, new Bill, spelling out the new system rather than just amend FSMA.”

He continued, and on this point I wholeheartedly agree:

“We are losing the simplicity and the ability to have a cleaner debate about the…framework.”

The more complex a system, the easier it is for it to go wrong and the more difficult it is to find out why it went wrong in the first place and to repair it.

One of the most profound elements of the Bill is the creation of the FPC, and we have heard a lot about that this afternoon. The FPC is charged with making sure that systemic risks do not emerge and that bubbles, such as credit bubbles, are not allowed to develop. That is unprecedented in our financial system and will have far-reaching implications. The interim FPC, as we have heard, has been in place for some time and the Treasury Committee has spoken with its members about how it is moving along, but its final format is yet to be set in stone.

At the FPC’s disposal will be a range of macro-prudential tools that it can use to control the financial system and markets, and I was pleased to hear the Chancellor say that we would be able to debate the matter on the Floor of the House and decide which tools will be available. The tools will fall into two categories, however. Those in the first category, which will be debated in the House, will be the tools of direction and might include such things as loan-to-value ratios for mortgages, liquidity requirements and capital ratios for banks, which could be directed on to the system via the PRA or the FCA. The measures in the second category, which have not really been talked about this afternoon, will be powers of recommendation and they can be absolutely anything. The actions of the FPC, however, will have the most effect not just on our economy but on our society.

Let me take one of the simplest cases by way of an example. The FPC, in its wisdom, might decide that a credit-fuelled asset bubble is emerging so it wants to tighten up loan-to-value ratios on mortgages. Instead of a 10% or 15% deposit on a house purchase, it will direct that lenders move to a 30% deposit. That is all very simple and fair enough. However, those who are affected first and most deeply will almost certainly be first-time

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buyers who will suddenly find they do not have the deposits to make a house purchase. People who have only recently bought a property and who therefore probably have relatively low equity might find that they are now not in a position to move house, which will have implications for the mobility of our work force. For a property developer, the tightening of the loan-to-value ratio alone might influence a decision not to develop their land bank. The tightening of that potential supply could lead to exactly the opposite effect on house prices to that which is desired. I hope that illustrates that the implications of such a simple move are widespread and can, indeed, be unpredictable.

As we have heard, the FPC will have a financial stability objective, which will develop from recommendations by the Treasury. The FPC will need to monitor indicators of financial stability, but we do not yet know what those will be. Nor do we know at what levels they will start triggering intervention. The interim FPC has given us a guide, but it gives little indication as to what will actually happen. Were it to publish its dashboard of limits in relation to where it does intervene, the markets would, to a certain extent, be self-correcting. However, there will be occasions on which it will not want to publish because it wants to be discreet or even secretive about its interventions. Under those circumstances, the Treasury Committee will find it difficult to scrutinise such secret interventions.

That brings me to my next point, which is incredibly important, on the governance of the Bank of England. Let me address the good news first: the Treasury Committee very much welcomes the move to a single eight-year term for the Governor of the Bank of England, as opposed to two five-year terms. However, that raises the possibility of a Governor crossing Governments of two flavours, and we on the Treasury Committee think it would make sense if Parliament, through the Treasury Committee, had a power of veto over the Governor’s appointment. The Chancellor took the unprecedented and extremely welcome move, after the election, of giving the Treasury Committee a power of veto over the appointment of the chairman of the Office for Budget Responsibility. Now we have seen how well that works in practice, we think the Governor’s appointment is another occasion for which such a power of veto would be appropriate.

More widely, the Treasury Committee is concerned about the governance of the Bank of England. I welcome the Chancellor’s comment about the new oversight committee, but currently the court is responsible for essentially administrative matters—pay and rations. We want the Bank to have a proper board with a new name that reflects its updated role. We recommend that the board should have a majority of external members, as we have heard from my hon. Friend the Member for Bury St Edmunds (Mr Ruffley), who must have more relevant skills and experience. The Treasury Committee wants the board to be able to conduct retrospective internal reviews of the Bank’s policy decisions. In its response to these calls, the Bank envisages limiting that power to commissioning external reviews or conducting internal reviews only of the decision-making processes of the Bank.

The creation of the FPC makes this governance issue particularly important. As we know, the MPC uses just two tools—quantitative easing and interest rates—and

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the minutes of its meetings are published so we know exactly what is going on, which is a very good thing. The FPC, however, has many measures at its disposal, both directive and recommendational—potentially an infinite range. By their nature, those measures might on occasion be implemented in a secret way, which means that the FPC might not be able to give a full and open account to the Treasury Committee or to publish entirely transparent minutes. Moreover, it might be years or even decades before we know that an intervention has taken place or even that an intervention has become necessary. That is why the governing body of the Bank needs to be able to look at the merits of the FPC’s policies and not just at the methods. The Bank’s board must not be restricted to finding out whether the wrong decision was made, but in the right way.

Crisis management is a crucial area about which much has been said this afternoon. I certainly welcome the creation of a new power of direction for the Chancellor over the Bank in a crisis, which was recommended by the Treasury Committee. The Bill requires that the Governor must formally notify the Chancellor in the event of public funds being at a material risk. The Chancellor cannot direct the Bank unless there is a threat to financial stability as well as a threat to public funds, and the scope of the power of direction is narrowly defined. The arrangements for crisis management are something that could be discussed in Committee, but clarity is vital. For me, the answer to this simple question is crucial. If I see an unhappy bunch of customers outside a bank in Kidderminster high street, who should I telephone? I think the Bill answers that question.

I have voiced a number of concerns from the Treasury Committee and they include my personal feelings. However, I welcome the aims and thrusts of the Bill and the fact that the Government have moved some way towards the Treasury Committee’s recommendations. Let me finish on this point: the financial services industry is incredibly important to this country in terms both of employment and of economic and fiscal contribution. It represents around 11% of gross domestic product, but it is already under widespread attack, including from the press and politicians. Over the next few months there will be a change to the regulatory regime, which we are debating today, followed by a change in the banking regulations, all mixed in with a plethora of new rules from Europe. It is vital that we sort out the current regulatory framework to ensure that we can spot and resolve the crises of the future, but it is just as important that we provide a stable regulatory platform to allow all the firms and individuals involved in this industry to continue to be profitable, to plan for the future with confidence and to be sure of regulatory stability.

Several hon. Membersrose—

Mr Deputy Speaker (Mr Lindsay Hoyle):
Order. Twelve Members seek to catch my eye so I am going to drop the speech limit to eight minutes to ensure that every Member gets in. If hon. Members do not take too many interventions, I hope we will make sure that happens.

8.14 pm

Chris Evans (Islwyn) (Lab/Co-op):
This Bill will amend a series of pieces of legislation. When we talk about reforming financial services, we have to think about

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innovation and how fast society and markets move on. When I think about the reform of financial services, I always think we should tread with caution. This Bill is very important in that it has to reform a system that has clearly failed. I worked in the financial services industry myself, many years ago, and when I want to judge a Bill such as this one, I think of three tests on financial education, financial inclusion and disclosure.

On the first test, it is highly important that we bring about not only statutory financial education in schools but a duty on banks to provide some sort of financial education. I use an example from my own life. Many years ago, when I first had my student grant, in the days when we had student grants, long before student loans, I remember jumping off the train with a cheque for £500 in my hands, almost shaking with nerves about what to do with it. I went straight into the first bank I saw, the name of which I shall not mention—I do not want to embarrass it, as I have not been a great customer. The bank opened a student account for me, gave me a £50 voucher to spend in Burton, with which I bought a pair of jeans, and gave me a magic bank card, which meant I could go anywhere I wanted and buy anything. I could go to the bar or a clothes shop and have all these wonderful goods. By about December of that year, I had a letter through the post saying, “Mr Evans, we’d like to talk to you about your unauthorised overdraft charges”.

When I worked, the same things seemed to be going on. There were people even in their 40s and 50s who did not understand that when they wrote a cheque it would come out of their bank account. They would ask me, “Mr Evans, how am I spending this money when I’m using my card?” I think that banks ought to have some fiduciary care for their customers and ensure that people understand what they are taking out. Things should be simple and understandable.

I want to make a second point about financial education. When people talk about financial education they mention consumers and people at the bottom end of the scale who get services from the bank, but when I was working in banks I often found that people who called themselves bankers did not understand the banking system. They did not understand what a clearing house was, what a CHAPS, or clearing house automated payment system, payment was or what a BACS, or a banker’s automated clearing services, payment was. I was very nervous about the fact that those people were serving people and selling them products but did not seem to understand how the banking system worked. When I spoke to management about that, they said, “Years ago, we had banking exams and this was a profession, but they have fallen by the wayside now as we have moved towards a sales model.” I have some sympathy with the banks, because they are not benevolent institutions—they have to make profits and sell their products—but consumers need to have confidence that the person selling to them understands what they are talking about.

That leads me to another point about consumer protection. Consumers need to understand the products they are being sold. I can think of many occasions on which people were sold products that they did not understand. For example, banks’ financial advisers said

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to people about bonds, “Oh, it’s okay—a bond is just a savings account, but you do not have a bank card to draw out on it and you have to keep it there for five years.” When people found out that bonds were being invested in risky ventures such as the dotcom boom, which eventually went pop, the banks had a number of complaints about that. It is very important that people understand what they are being sold and that everything is clear.

I also think there should be some framework for the sellers. I remember when the financial planning certificate came about. The very first paper asked, “If somebody came into the bank and wanted to protect their family if they died, what would you sell them—A: life insurance, B: general insurance, or C: send them home?” That is quite simple and there is no knowledge in knowing that they must be sold life insurance. It is important that we have some sort of framework.

The most important part of the Bill, which does not go far enough, concerns disclosure. In America there is the Dodd-Frank Act, which says that every financial transaction made in the US has to be documented through an office of financial research. I would like to see that added to the Bill at some point. It comes to this: the financial crisis happened as a result of myriad problems—we cannot pinpoint one—but one weakness in the system was that we did not know about financial transactions.

I will give two examples. First, Barclays wanted to buy Lehman Brothers. The board said yes, but the regulator, which had so much on its plate, said no. Then Lehman Brothers went bust and was no more. Four years later, the bank and the regulator still do not have access to that information. Secondly, RBS, which has been mentioned a lot today, said to the regulator and to its board in March 2007, “We do not have any toxic debt or bad-book mortgages.” Yet it was later found to have £1.7 billion of bad-book lending. It, too, went bust. It is therefore important that we have some sort of financial audit, which would have an advantage for the consumer, as we would know how many bad basic bank accounts we have and who the banks are lending to. It would also help with community lending.

I will digress a little, if you will allow me, Mr Deputy Speaker. I have a personal bugbear with the basic bank account. It was brought about for financial inclusion, and it is important that everyone has access to financial products, but my experience of the basic bank account when I worked in the bank was that often the people with that account were on benefits or moving jobs. When it came to lending, they found that they did not credit score and often sellers were not interested, because those people did not credit score for credit cards, bank loans or any other financial products. They were then simply left to their own devices and often fell into the hands of payday lenders and legal loan sharks, as my hon. Friend the Member for Walthamstow (Stella Creasy) has mentioned.

I believe that through the FCA we have a chance to bring about financial inclusion audits and to map where each financial transaction takes place. It would be very dangerous to say that a financial crisis will never happen again, but I hope that we can put things in place to ensure that, if it does happen again, it might not be as bad as it was this time. The US has the tool, so why can we not have it?

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8.21 pm

Mark Field (Cities of London and Westminster) (Con):
To be frank, I still regard too much of this legislation as deficient, and I shall touch on some specific concerns, but it would be remiss not to give the Treasury significant credit for some of the work it has done. The extensive and broadly constructive pre-legislative consultation by the Joint Committee is a positive step. The outstanding and ongoing contribution of the Treasury Committee will help to focus the Government’s mind on some of the key institutional pitfalls. There is also an increasing recognition by the Treasury that this is an area of public policy where political judgments will need to be made, and that ultimately the buck must stop with it, not with the Bank of England, however good a Governor we may have.

My general dissatisfaction relates first and foremost to the inevitable guillotine in this House, which means that the high-level sophisticated scrutiny will have to come from the other place, and I fear that that shows our House in a poor light. It is not that we lack collective experience in this crucial field, but the wish of Governments, throughout my 11 years in the House, to get legislation through by whipped votes means that we continue to fail to hold the Executive to account, particularly on such important pieces of legislation.

This is probably the only area where I have some sympathy with the shadow Chancellor. The genesis of the Bill was perhaps a rather simplistic political analysis surrounding the financial collapse of 2007-08. It was not really the tripartite system of regulation that was at the heart of those concerns, but an old-fashioned debt and credit bubble and the global imbalance between the east and the west. It is important that we recognise that, because the result was not simply the failing of banks, bankers and Labour politicians; the simplistic analysis also fails to answer the core question that has dogged regulators ever since the financial crisis began: “When the crash came, who was in charge?” The risk is that we will replace an unsatisfactory tripartite system with a potentially even more complex four-way system. I think that there is a risk that that will come to pass, although I do not buy into the shadow Chancellor’s entire analysis. In truth, the new FCA will have too few people of the requisite expertise and sound judgment. Unsurprisingly, it remains very unloved and unrespected by too many professionals in the City, and I am afraid that that matters, given the important role that it will have.

Let me touch on some of the more substantial political issues that the press have not focused very much on. There is an overall concern about how prescriptive the new regime will be, and to what extent the Bill will recalibrate things in a way that will have unintended and potentially damaging consequences for the industry, the UK and the consumer. I will give a few examples. On the warning notice publicity, the Bill will change the current position whereby enforcement action becomes public only at the end of the process, after the firm has decided whether to go to tribunal, and before that stage has had two opportunities to make representations. The new approach means that there will be negative publicity at the stage of the warning notice—the first notice—and the firm will have no right to make representations before that. The reality is that, essentially, the Daily Mail test means that all the damage to the firm’s reputation will be done before any due process has been gone

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through. The argument in favour of the change is that this is similar to a criminal case, but that misses the important difference between the cases, and represents a worrying trend in the thinking, to the effect that everyone in the industry is somehow a would-be criminal.

Mark Garnier:
Will my hon. Friend give way?

Mark Field:
I am afraid that I will not.

Product regulation and financial promotion powers are another issue. There are powers to intervene earlier in the product life cycle and ban financial promotions. There is an argument that the FSA already has the power to do this. The big political point is the balance between market and regulatory failure. All the debate has been about how the powers are needed to prevent market failure and how the regulator will be far more involved in product design and in the business. It is difficult to argue with the concept, but the position that there is no moral hazard in going down this route is arguably naive, and fails to recognise that the regulators never have perfect vision.

The cost of regulation is in many ways the dog that has not barked. There is nothing in the Bill to apply more financial discipline to either the PRA or the FCA, so the cost-benefit analysis does not apply to the rules that they have in place. We must also ask how the new regulators will work together. The Bill sets out certain principles for the memorandum of understanding between the PRA and the FCA, which is perhaps all that can be expected. However, that leaves on trust a lot of the detail of how the new organisations will work together. That is a key practical issue for firms if this is not to lead to new and inconsistent regulation.

One good example relates to threshold conditions. The Bill provides the PRA and the FCA with the power to make threshold condition codes, which will elaborate on the conditions and how they will apply to different classes of firm. Those codes will be binding. What will happen if the two regulators take inconsistent approaches on, for example, explaining what they mean by the suitability condition? The last thing anyone wants is the development of an industry engaged in arbitrage between the two inconsistent approaches to regulation for different parts of the industry. That is a particular worry for dual- regulated firms, and firms left under the FCA, such as fund managers, are concerned that they could suffer from more heavy-handed regulation, rather than the more senatorial style that it is assumed the PRA will adopt.

Will there be enough of the secondary framework to be able to consider the new structure properly? That is a general question, and one example is whether investment firms are within the PRA’s scope. Firms do not yet know, and things keep changing. For example, the Government agree that the risks posed by investment firms and the concerns arising from last autumn’s MF Global failure should continue to be subject to scrutiny by the authorities, which might change the boundary. The point about MF Global is that it did not take proprietary positions, and so would have fallen on the FCA side. The argument is that the organisation has caused great systemic problems, and so surely should have been regulated by the PRA.

That question has now been partly—but only partly— addressed, through the draft designation order published on the Treasury’s website, setting out the criteria that

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the PRA will apply when considering whether it should designate individual firms as “dealing in investments as principal” for PRA regulation. Has enough thought been given to that issue, however? There is a parallel debate about large hedge fund managers, who deal only as agents, and therefore stay on the FCA side, yet arguably pose a systemic risk themselves. It is hard to look at the new framework in the round until all such details are sorted out.

I shall conclude soon, because I appreciate that other Members have more to say. Indeed, there is so much more that I could say myself. One issue that has been widely discussed is the competition objective, which was especially well dealt with in the Joint Committee’s report. The point often missed is that the whole discussion is about competition within the market, and whether that itself should be an objective or principle to which the FCA ought to be compelled to have regard. It is not about the more fundamental issue of the competitiveness of the UK as a financial services centre, important though that is. That says something about the new approach to the industry.

I fear that we risk throwing the out baby with the bathwater. Why should the UK not have regard to the competitiveness of one of its most important industries, subject to the other important goals of market stability and consumer protection? Rebalancing the economy is all well and good, but it should not mean undermining the vital importance of the City and of financial services to the UK as a whole.

8.29 pm

Mr William Bain (Glasgow North East) (Lab):
This Bill makes certain changes to the supervision of the banking and wider financial services sector, and Opposition Members can give guarded support to them, but it falls far short of taking the much-needed action to regulate payday lenders and the total cost of credit, to secure growth and jobs as goals of the new regulatory bodies, and to make the necessary reforms in the banking sector’s excessive pay and remuneration, which was one of the key factors driving the financial crisis in the first place.

A growing body of research, from the OECD to White House economists, shows that societies with a smaller gap between the richest and the poorest achieve higher long-term growth. This Bill could have taken real steps to tackle inequality and the culture of high bonuses and pay in the financial services sector by implementing in full the recommendations of the High Pay Commission to put an employee representative on the remuneration committee of firms in the banking sector, to require the publication of the pay ratios between highly paid financial services staff and those on average wages, to ensure that all publicly listed companies in the sector produce fair pay reports, and to establish a permanent body to monitor high pay.

The High Pay Commission recently discovered that in Barclays, between 2009 and last year its top executives’ pay was 75 times that of its staff on average pay, and the ratio in Lloyds Banking Group was precisely the same. Since 1979 the pay of the top Barclays executive has gone up by 4,899%, to £4.365 million last year.

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There appears to be a growing mood on the political right, particularly in the United States, to take the view that those issues do not matter, but in Britain they do, and the Government could have done far more in the Bill to show that they stand with the 99%, rather than with the top 1%.

The Bill could also have secured more justice for the young and poor in our society by introducing a tax on bank bonuses for the next two years—the first step in tackling the youth unemployment crisis, the scale of which the excellent report by the Association of Chief Executives of Voluntary Organisations exposed this morning. Youth unemployment costs the economy £10.7 billion, and the loss in tax revenues amounts to £2.2 billion per year. How disappointing that the Bill has not taken the first step to end that injustice today.

The Bill also wastes a golden opportunity to introduce controls on payday lenders and to impose caps on the total costs of credit. Shelter published research last month which found that almost 1 million people have taken out a payday loan to help pay their rent or mortgage in the past year, and that almost 7 million people rely on credit to meet their housing costs. The Bill could have limited the number of loans that a borrower might take out at any one time or on a repeat basis, as Consumer Focus recommended two years ago. Campbell Robb, the chief executive of Shelter, said on 4 January:

“Turning to short-term payday loans to help pay for the cost of housing is totally unsustainable. It can quickly lead to debts snowballing out of control and can lead to eviction or repossession and ultimately homelessness.”

On the structural changes to the supervisory framework for financial services, the Bill provides greater clarity through clause 57, so, in the event of a major crisis affecting the financial system, the Chancellor of the Exchequer will have the power to issue to the Bank of England directions on support for the financial system, including the use of Government funds. That is important in emphasising political accountability to this House.

The Bill is important to the people of Scotland. The financial services sector amounts to 7% of Scottish GDP, employs 150,000 people in Scotland and contributes £7 billion to the Scottish economy. Scotland has the headquarters of RBS, Clydesdale bank and Tesco bank, and it remains a key location for Lloyds Banking Group and other financial institutions. The future regulation of the sector is therefore critical in the momentous decision that the people of Scotland will soon make on their constitutional future.

The benefits of Scotland’s full participation in the UK financial system were keenly felt in 2008. The report of the Independent Commission on Banking made it clear that the total financial support, including loans and guarantees, provided to the banking sector throughout the United Kingdom during the crisis was of the order of £1.2 trillion. Two of the major beneficiaries of that support were banks based in Edinburgh.

There is a noticeable lack of clarity in the Scottish Government’s views on the Bill. It is unclear what their proposals for separation would mean for the protection of savings deposits in Scotland. There is a complete absence of detail on who the prudential regulator of banks based in Scotland would be if Scotland voted for separation and on the ability of the banking sector to sustain the levels of lending to Scottish businesses. The

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Scottish National party has said that it would still wish to receive the benefits of the Bank of England’s support for a separate Scottish financial system, but it has not been forthcoming on whether it would accept a continuing remit for the new Financial Policy Committee in the regulation of the banking sector.

Cross-border financial regulation is good for Scotland and for the UK as a whole. Our system would be weaker on all sides if RBS was split and regulated under one set of rules and institutions in Scotland and under another set of institutions here, along with the other major banks in the UK. Under its preferred post-separation model of establishing a currency union with the United Kingdom, with the Bank of England as lender of last resort, the SNP has not come clean on whether there would be a Scottish central bank, what its functions would be, what its relations with the Bank of England would be, or how banks in Scotland would be regulated in future. Would the SNP seek to regulate the banks and the financial services sector within Scotland, or would it leave that with the Bank of England? If it does plan to have a separate regulatory structure, what form would it take? There is a plethora of unanswered questions, and it is time that the people of Scotland had the answers from the Scottish Government.

The Bill has some satisfactory elements, but overall it does not meet the scale of the challenge of establishing a more socially responsible financial services sector. If it is to command support in the country, the Government will have to be open to amendments in Committee to restore confidence to the banks and credibility to the regulatory structure across the United Kingdom.

8.38 pm

Stephen Barclay (North East Cambridgeshire) (Con):
It is a pleasure to follow the hon. Member for Glasgow North East (Mr Bain). I pay tribute to my hon. Friend the Financial Secretary to the Treasury for what is a very good Bill. It displays the diligence and expertise that he brings to his ministerial duties.

I am sure that the Financial Secretary would be quick to recognise—and here I have some sympathy with the line pursued by the right hon. Member for Morley and Outwood (Ed Balls)—that no regulatory structure is a panacea for regulatory risk. We saw that with the Bank of Credit and Commerce International and the Bank of England. The Bill does not address the core lesson from the recent regulatory failure, which is the failure of capital and liquidity rules. In essence, what we are debating is the supervisory arm of an EU regulatory policy agenda. Fortunately, my hon. Friend the Member for Stone (Mr Cash) is not in his place or he would be intervening at this point.

For all the strengths of the Bill, I will touch on three areas where I fear the expectations of our constituents may be raised, but where the regulator may not have the power to meet them. The first is the extent to which the Financial Conduct Authority will have an interventionist approach and its objective of promoting competition. The second is its ability to achieve speedy resolution, which was addressed briefly by my hon. Friend the Member for Cities of London and Westminster (Mark Field). The third is whether it will achieve effective enforcement against individuals and whether there should be strict liability. Indeed, my hon. Friend the Member for West Suffolk (Matthew Hancock) touched on whether

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there should be criminal sanctions, a point that was floated in Lord Turner’s RBS report but not answered. If time allows, I also wish to put forward a proposal on which there may cross-party consensus about how fines imposed when there is a regulatory breach are redressed and what is done with the funds.

I would be grateful if my hon. Friend the Financial Secretary addressed the risk-tolerance of the new consumer regulator. There has often been a misconception that regulators are about ensuring zero failure, and I would welcome some sense of the point at which the new regulator will be judged as having failed to intervene, and what size and scale of failure in the regime is tolerable.

On the competition objective, some Members have referred to the lack of a power for matters to be referred directly to the Competition Commission. They have to be referred via the Office of Fair Trading. There is potential for two regulators to have different interpretations, and therefore for duplication of costs and confusion about where the power of one regulator ends and that of another starts.

My hon. Friend the Member for Cities of London and Westminster touched on the need for speedy resolution. To take the example of payment protection insurance, a firm can appeal to the regulator and seek a 90-day review, and then it can have the decision judicially reviewed, which can stretch things out for about a further 18 months. A firm can stretch out proceedings in a mis-selling case for tactical reasons, so that it can use the funds in question in the short term. The thoughts of my hon. Friend the Financial Secretary on that would be welcome.

The key issue, which always arises in my constituency, is the sense of grievance that there has not been enforcement action against individuals. That was at the heart of the Treasury Committee’s reason for requiring a report from Lord Turner, but nothing in the Bill really addresses the issue. It does not say whether there will be strict liability, and there are no proposals to frame criminal sanctions. For what it is worth, I believe they would be very difficult to frame.

Within banks, the real problem is that senior executives protect themselves through complex management structures, such as by devolving control functions lower down the organisation so that there is a buffer between them and the decision making and they are knowingly blind. Risk functions often report into finance directors, meaning that there is a potential conflict of interest, and compliance officers often get to shape meetings with supervisors, notwithstanding the more intensive regime that the regulator is currently following.

A key issue that we need to address either in this Bill or in future legislation is how individuals at the top of banks are held accountable when there are mistakes. My hon. Friend the Financial Secretary might need to have discussions with the Lord Chancellor about that, because judicial review and the risk appetite of the tribunal need to be addressed. Given their judicial nature, those points fall within the Lord Chancellor’s responsibility. They go to the heart of whether people get a sense of justice being done when there are serious failures.

I move on to a matter on which I would welcome comments from both Front Benchers in the winding-up speeches, and on which there could be scope for positive reform. That is what happens when a firm pays a regulatory fine. It may surprise Members that currently,

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under paragraph 16 of schedule 1 to the Financial Services and Markets Act 2000, when there is a fine for a regulatory breach the money does not go to good causes, or even to the Treasury—my hon. Friend the Financial Secretary might think that the Treasury is a good cause in itself. It goes towards reducing the levy paid by other financial firms. When a bank breaks the rules, it reduces the levy for other banks. Over the past two years, such money has amounted to £166 million. I know that a number of Members are keen on financial education—the all-party group on the subject is the biggest in the House. Perhaps such a fund could be hypothecated for use in a more constructive way, and I would welcome comments on that in the winding-up speeches. I recognise that firms are contributing more to financial education now, but it is odd that they benefit from the regulatory breaches of other firms.

I shall conclude, because I am aware of the time limit and want to allow time for others to contribute. The Bill is a good one, but as I said at the beginning of my speech, there will be failure. When there is, an independent report is the most reasonable of expectations. It is instructive that Lord Turner is not a neutral player. Will the Minister clarify how much his report cost to compile? I would like scope in the Bill for an independent report in future if we are in the unfortunate position of having a further regulatory failure. That the Treasury Committee had to seek private experts so that it could comment on Lord Turner’s report speaks volumes. That small matter could be tightened up in Committee.

Overall, this is an excellent set of measures, and I will have great pleasure in supporting my right hon. Friend the Chancellor in the Lobby this evening.

8.45 pm

Mark Durkan (Foyle) (SDLP):
Like the hon. Member for North East Cambridgeshire (Stephen Barclay), I shall address areas in which we need to proof and improve the Bill before it goes to another place.

I first want to express support for the hon. Member for Walthamstow (Stella Creasy) in respect of consumer credit protection. Not only lenders of consumer credit should be under the FCA, but debt collectors, brokers, retail services that sell insurance products and those offering debt management services.

Similarly, I support the hon. Member for Rutherglen and Hamilton West (Tom Greatrex). Contrary to suggestions made earlier in the debate that the Bill is about putting Parliament back in charge, it is notable that inquiries and investigations under part 5 go to the Treasury. There is no reference whatever to Parliament in that measure, unlike in section 14 of the Financial Services and Markets Act 2000, which clearly states that any such report will be laid before Parliament.

The Financial Secretary no doubt anticipated that I would mention credit unions in Northern Ireland, because their regulatory status will change in the wider context of the changes heralded by the Bill. He was good enough to receive a pick-up band of Northern Ireland MPs last week to discuss our outstanding concerns on the detail. I can assure him that we are pursuing those. We have not yet eliminated him from our inquiries, but we are making the necessary representations to the FSA and will make them to its successor, the FCA.

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I wanted to talk not just about the implications of the Bill in terms of the lessons of the banking collapse, but about other provisions. The launch of auto-enrolment means that millions more people will save for a pension through the capital markets, including many low-paid workers. In recent months, we have seen that pension savers’ interests are not always put first by the industry. The spotlight has been turned on to excessive and untransparent charges, and conflicts of interests.

The fund management industry’s duties to savers are poorly understood and observed. The Law Commission has confirmed that when firms manage other people’s money or give financial advice, they have strict fiduciary duties to act in their clients’ interests—both individuals and institutions, such as pension funds, that represent large numbers of underlying savers. That fact is, of course, not generally accepted or reflected within the industry. In addition, as we have heard, because those are common law duties, they do not form part of the FSA’s regulatory approach. An explicit reference to fiduciary duty in the Bill would give the FSA a powerful tool to ensure that consumers’ interests are protected.

Examples of where consumers have suffered from those duties not being observed include unauthorised profits, and recent research shows that some fund managers made significant profits from lending out clients’ shares with only two thirds of the income from those activities returned to the fund. Of course, under fiduciary duties, any such profit should go back to the underlying investor. Another example is in relation to the exercise of shareholder rights. Asset managers, acting on behalf of pension savers, should exercise their voting rights at major companies in the best interests of the savers, without regard to the interests of the firm, but we have anecdotal evidence of fund managers being told by superiors to wave through excessive executive pay to avoid upsetting potential clients. So the interests of the business are placed ahead of the savers whose money is at stake.

David Mowat:
I agree with the hon. Gentleman’s point about the market failure that we have seen in the pension and fund industry in the last decade or so, which is close to being a scandal. He is right that the Bill does not include a fiduciary duty, but it would give the FCA a competition requirement that, if applied properly, would prevent the market failure and the non-transparent charges that are the core of the issue.

Mark Durkan:
The hon. Gentleman has more confidence in the extensive effect that he expects from the competition requirement. I believe that that should be complemented by this other insertion in the Bill.

During pre-legislative scrutiny—about which we heard earlier—the Joint Committee heard that the Bill was unbalanced. On the one hand, it enshrines the principle that consumers are responsible for their decisions, but on the other it does not place any equivalent responsibility on firms. The Joint Committee recommended that the Bill should

“place a clear responsibility on firms to act honestly, fairly and professionally in the best interests of their customers.”

Meanwhile, the Financial Services Consumer Panel recommended that this should take the form of an explicit fiduciary duty to clients.

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In response, the Government have inserted a new principle to which the FCA must have regard, which is that

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate”,

having regard to the risks involved and consumer capabilities. But that new wording does not provide a high enough level of protection for customers. It clearly lacks clarity on what might constitute an appropriate level of care and stops short of confirming that those managing other people’s money owe fiduciary duties. We need an explicit clarification in the Bill.

Another area in which the Bill is remiss is the whole principle of stewardship. In the aftermath of the financial crisis, it was widely recognised that major institutional investors had behaved as absentee landlords, not doing enough to challenge risky behaviour at the banks that they owned. This had direct consequences for many of the pension savers whose money those shareholders invested. According to the OECD, in the year after the crisis pension funds lost an estimated 17% of their value.

After the crisis, we had the Walker review, and the Financial Reporting Council established the UK stewardship code, designed to encourage investors to behave as active owners of the companies in which they invest. This agenda is increasingly recognised by both the Government and the Opposition in all the recent, highly publicised arguments about executive pay and what can be done to curb it. Both leading parties in this House have placed great emphasis on more shareholder responsibility. But to date the FSA has treated this as a fairly marginal issue, appearing not to regard it as a consumer issue. It is not clear that it will be regarded any differently by the FCA.

There is no mention of stewardship in the Bill, although it is clearly relevant to the objectives of the PRA and the FCA. In particular, there is a danger that stewardship will continue to fall through the cracks in the new regulatory architecture. The PRA is likely to take little interest, because the ordinary asset managers of the firms in question are FCA-regulated, yet there is little reason to assume that the FCA will accord the issue any higher priority than the FSA does at present.

The proposed duty of co-ordination mentioned earlier by the hon. Member for Cities of London and Westminster (Mark Field) will do little to resolve that issue, because it will focus purely on reducing the burden of regulation on dual-regulated firms, rather than on preventing gaps in regulation between the new authorities. That measure will deal with an overlap as it affects the business; it will not deal with the gaps affecting consumers. Again, there is a hole in the legislation as far as consumer protection is concerned.

Several hon. Membersrose—

Mr Deputy Speaker (Mr Lindsay Hoyle):
Order. There are still seven people who wish to catch my eye, and we are struggling with interventions. Time is ticking away, so I will have to drop the limit to seven minutes. Hopefully, I will not have to drop it again.

8.55 pm

Alun Cairns (Vale of Glamorgan) (Con):
I will endeavour to say as much of what I planned to say as I can in the existing time frame.

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There is no doubt that the Bill should be welcomed and that it will help right the wrongs of the former tripartite structure that contributed to the banking collapse. The tone of this debate is important. It would be easy to labour the failures of the previous Administration and highlight why Opposition Members, particularly those on the Front Bench, must accept their part in the financial crisis of 2007 onwards and the subsequent fallout. It is all too easy to use the banks as whipping boys, but in reality it was politicians and Governments who allowed many questionable practices to go on.

I regret the tone of some recent news stories about bankers, whether they relate to bonuses or to other controversial issues. We must consider how such matters destabilise an extremely valuable sector that employs more than 1 million people across the United Kingdom, amounts to 10% of our GDP and contributes between £35 billion and £63 billion to the Treasury every year.

I do not seek to defend the indefensible, but let us at least consider the longer-term consequences of what is said and done, and the tone in which it is said. In considering last week’s debate on bonuses, for example, I hope that Stephen Hester does not choose to leave RBS any time soon, as it could cost a significantly greater sum to attract someone to fill the post, particularly in this difficult public climate. A mature debate is needed on remuneration, which many in this debate have mentioned, but we should be level-headed and remember that how we conduct the debate, as well as its outcome, will affect our economy and growth prospects.

To the Minister’s credit, a huge amount of work has been done on the Bill. Not only have there been several opportunities to pursue the matter here in the Chamber, but the pre-legislative scrutiny Committee chaired by my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) developed the Bill further, as did the Vickers report and the scrutiny of the Treasury Committee.

My first substantive point relates to structure and culture. The tripartite structure had to end; we are all aware of its deficiencies. The twin-peaks approach and the establishment of the FPC, the PRA and the FCA also make sense, but it is important to recognise the need for the legislation to be forward-looking rather than focused on the mistakes of the past.

It was interesting to read evidence from a number of witnesses who supported the proposals but still refused to commit to saying that if the new structure had been in place in 2007-08 or before, the banking collapse would not have happened. It is important that we seek to develop a regulatory framework that can adapt. A simple tick-box approach—we have heard much about that—or an isolated approach set up to prevent the recurrence of the last crisis will do nothing for a dynamic industry always seeking to evolve, to be innovative and to generate income for the country and its shareholders.

The Minister is taking the right decision to set up those bodies, but much will depend on the leadership that their members will offer. Several times in the past the House has been involved in the establishment of new agencies only to have to return to their shortcomings within a year or two.

The culture that each chairman or chief executive develops with the Governor will be crucial to the success of this legislation. The relationship between each organisation is also important and, as ever, will inevitably

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depend on the Governor, chairmen and chief executives. Such relationships need to be open, and there needs to be a clear understanding of the part that each person plays. They should not operate in isolation, and there needs to be clear accountability, with the ultimate test of knowing who should get fired.

I want to highlight the issue of concentration risk or groupthink, given the huge emphasis that is placed on the Governor. In that respect, amendments suggested by the Joint Committee to strengthen ties with the Treasury and Parliament are welcome. I am grateful that the Minister has accepted some of them.

It is clear that, within the proposed structures, the judgments of individuals will ultimately make the difference. The Bill provides the FPC with considerable powers of direction, but the levers generally used by the PRA or FCA will also determine the fate and future of the industry. That is the area of greatest concern across all three bodies, yet there is no alternative if we are opposed to the inflexible tick-box approach criticised tonight. Regular parliamentary scrutiny will be essential, and the role of Treasury officials on many of these bodies will be crucial for feedback to the Treasury and parliamentary scrutiny.

In making their judgments, the PRA and the FPC will need to respond to the evidence. A one-size-fits-all approach will not serve the economy or the financial services sector well. Their engagement with the organisations that they regulate will need to be risk-based, but that flexibility, which is needed, must not lead to inconsistent actions. Sir Mervyn King stated that judgments are undermined when we end up with a game in which regulators are continuously rewriting the rules as firms devise new products to get around the detailed legal rules in place before. A tiered approach is needed, therefore, to allow certainty and due process that also reflects the risk and culture of the organisation.

The FPC and regulators do not operate in isolation, and international factors need to be considered. It is fair to be concerned, therefore, that UK authorities could seek to raise the bar, and the risk of super-equivalence is real and always worries the leaders of many of these organisation.

Mr Deputy Speaker, I am sorry that time does not allow me to complete my remarks about the FPC.

9.2 pm

Sheila Gilmore (Edinburgh East) (Lab):
The hon. Member for Vale of Glamorgan (Alun Cairns) referred to what he thought was the regrettable negative public opinion towards bankers, but we have to accept that over a considerable period the banking industry has changed so dramatically that perhaps it needs greater regulation.

My mother-in-law remembered that when as a student she went overdrawn, the bank would write to her father, and that when she got home for her summer holidays, she would be in big trouble. In contrast, my children were automatically given a £1,000 overdraft as soon as they presented their new student cards at the bank. Before I could say, “Hang on a minute, perhaps that isn’t terribly wise,” they found themselves unable to refuse this largesse. That demonstrates the change that has taken place over a couple of generations. To that

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extent, the banking industry has to look to itself, not just to external regulation, and ask where things have gone wrong.

At the beginning of this debate, when things were a bit livelier—they are often livelier at the beginning than near the end—much was made of whose fault it was, who did not regulate, and whether the Opposition would apologise for failing to regulate and for the financial collapse. That is rich coming from a party that, even when the financial crisis was beginning to crash around us, spent so much time saying that there was too much regulation. There are clear quotations to that effect, with the current Prime Minister saying in 2008:

“As a free-marketeer by conviction, it will not surprise you to hear me say that a significant part of Labour’s economic failure has been the excessive bureaucratic interventionism of the past decade…too much tax, too much regulation, too little understanding of what our businesses need to compete in the modern world.”

There are many other quotations like that. It is not just that the then Opposition were not standing up and saying that we needed more regulation; it is that they were going beyond that and saying that there was too much regulation.

We all have to reflect on that. I have no hesitation in saying that I believe the last Government did not sufficiently regulate the financial services industry and should have done more. We have seen many of the difficulties caused by that. The FSA has been roundly criticised by many of the victims of financial collapses. My hon. Friend the Member for Rutherglen and Hamilton West (Tom Greatrex) talked a lot about Arch Cru and how it worked. Many of us in have had people come to us affected by the Equitable Life collapse, which was due to the failings of both the FSA and its predecessors. We know how people’s lives can be affected. It is extremely important that the new regulatory architecture, as it seems to be called, should grapple with the kind of situations that have arisen and how they affect people.

We also need regulation that looks at the most vulnerable, which is particularly important. Citizens Advice, which deals with a lot of people’s problems, has suggested that the FCA be placed under an explicit duty to be proactive in preventing and responding to consumer detriment, and to have particular regard to the needs of low-income and otherwise vulnerable consumers. Earlier we heard about high-cost credit and what it does to people, but Citizens Advice has suggested that the problem goes much further. It includes, for example, the way that cheques have been phased out of the banking system, with little regard for the needs of those with little choice but to use them, and the way that people have perhaps been encouraged to bank online and not otherwise, which could be to the detriment of those who cannot do so. Indeed, it might even include the way that banking itself works. Many of us think it is wonderful to have free credit for having a current account and not to have to pay fees. However, there is a downside to that, in that it is often funded by what those who become overdrawn—not necessarily because they are wholly irresponsible; rather they may simply be hard up and experiencing difficulties—have to pay for that. Those are all things that we should be considering, but if the new body does not have an explicit duty to consider such matters, they might simply not be dealt with properly.

We have heard, too, that some of the things that the Office of Fair Trading does on consumer credit—things that most of us probably feel it has not done very well

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over the years—will be transferred to the new organisation. Again, we need to know as much about that as possible, and as soon as possible. It is not good enough to say, “That will all come along in due course.” There have been clear failures in the system to look at the issue in enough depth, to act quickly enough and to ensure that people are not faced with poor banking and credit practices. Basic bank accounts is another area. The current Government appear not to want to place an obligation on banks to provide a right to a bank account, for which the previous Government had proposed to legislate. I hope that the Minister might take this opportunity to reconsider the position that he expressed when I had a Westminster Hall debate on this very subject some months ago, and to decide that he will go ahead with such a proposal, because the position on basic bank accounts has deteriorated since that debate.

Nic Dakin (Scunthorpe) (Lab):
My hon. Friend is making a clear and powerful case for regulation in appropriate places, and I would be grateful if she continued her exposition.

Sheila Gilmore:
Although it is widely believed that regulation for the poorest is particularly important, those of us who have witnessed the kind of financial failure that so many people have had to put up with are aware that it is important not just to the poorest, but to a number of those with reasonable incomes. Our Work and Pensions Committee has been discussing pension auto-enrolment. One of the fears expressed was that people would not want to save because they did not trust the financial services industry. If we want people to save properly we must ensure that they feel that trust, and it could be re-created through proper regulation.

9.10 pm

David Mowat (Warrington South) (Con):
I agree with those who have said that we are here to make a good Bill better. The financial services industry is vital to our country, and it is possible that we lead the world in that industry more than in any other, yet it is an industry that lost us near enough £200 billion three or four years ago. We need to chart a course between not locking the door after the horse has bolted and ensuring that we establish a regulatory framework that looks to the future.

Some have said that the most important aspect of regulation is not the structure, and that may cause us to wonder why we are moving from a tripartite structure to a twin-peaks system. Many words have been used tonight, but I believe that one that has not yet been used provides the most important explanation for the failure of the tripartite structure. I refer to the word “underlap”. The structure failed because none of its three components felt wholly responsible for taking the action which was needed and which they suspected might be required. That is why the twin-peaks system is sensible. It is not a “quartet”. I think that the shadow Chancellor’s point about a quartet indicated that he did not understand the issue of underlap or take it at face value. Undermining the responsibility of the Governor of the Bank of England by asking his deputies to act as whistleblowers takes us back to that structure of underlap.

The Bill could be improved in three respects. First, I want to talk about the importance of international and European co-ordination, about which my right

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hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), the Chairman of the Joint Committee, talked at some length. I have a little more sympathy for Mr Barnier than he has. Secondly, I want to talk about competition. Thirdly, I want to talk about the link between the Bill and the work of the Independent Commission on Banking and the Vickers report.

We are regulating two types of entity in the banking sector, those that are predominantly in the United Kingdom and those that are international, and I believe that the UK entities have been regulated to death. Apart from the ring fence, the capital requirements, all the buffers, the tier 1 and tier 2 capital and all that goes with it, I believe that we have fixed the problem, but one issue is still out there. If I were to predict where the next crisis will come, I would say that it will come in the international banks that straddle boundaries and continue to grow in complexity and scope: the investment banking and brokering parts of organisations such as Goldman Sachs, HSBC, Deutsche and BarCap.

Collectively, those organisations control $4 trillion of derivatives. I do not fully understand the economic purpose of $4 trillion, but I do know that regulating those entities is outwith the competence of a nation state, and we must be careful that we do not think we are doing it by passing a banking Act within our nation state. The organisation within those banks is global, the way in which they look at themselves is global, and the way in which they move capital around is global.

The Joint Committee took evidence from the Governor of the Bank of England, who explained that he would supply liquidity to an overseas bank with a subsidiary in the United Kingdom that wishes to fund activity in South America. The issue is global, and I want to talk about MF Global, the derivatives trader that went bust in the middle of October. Amazingly, the organisation was considered to be outside the scope of the PRA, yet its balance sheet was more than £40 billion. The capital flows between the USA and the UK were huge, and there now appear to be issues of insider dealing. Between £1 billion and £2 billion of customer funds have been lost. What happened to that bank is a model for the kinds of problems that we will have in controlling the financial system over the next two decades, and we need to focus on such organisations. It was a relatively small bank, only a tenth the size of Lehman Brothers, but its problems crept up on us and took us completely by surprise. There are many more banks and shadow banks like it. I would like the Minister to acknowledge this issue. It is not enough simply to say that we have colleges of regulators. I believe that this is the area in which the next crisis will arise. If I am right, I could be made Business Secretary.

The hon. Member for Foyle (Mark Durkan) mentioned the pensions industry. The important aspect of the Bill is the competition objective. The City and the financial services industry would benefit from the systematic application of competition. The problem with systemically high salaries is not, in my view, the bonus culture; it is that there has not been enough competition in the industry to bring the salaries down. That can occur when the barriers to entry are too high, when there is market dominance or when there is asymmetric information—that is, when the organisations have much more knowledge than the punters. That is particularly true of the pensions industry. The hon. Gentleman mentioned fiduciary duty.

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The fundamental problem is that the charging is too high, but the fiduciary duty requirement will not take that away, because the organisations think that the charging is all part of their applying their fiduciary duty. The funds industry needs to reach a point at which something like 31% of a pension pot no longer goes on charges in the private pensions industry, and it needs competition to achieve that. Such charging is one reason why this country is so massively under-pensioned, and the issue needs to be fixed before auto-enrolment provides a further subsidy for the industry.

9.17 pm

David Rutley (Macclesfield) (Con):
Thank you, Mr Deputy Speaker, for giving me the opportunity to speak in this important debate. Financial stability is the foundation that every economy requires for sustainable growth, so it is critical that we rebuild trust in the financial system and address the continuing crisis of confidence surrounding it. The Bill will play a pivotal role in achieving that objective, and I give it my wholehearted support.

It has been well documented in the debate that the tripartite system, of which the shadow Chancellor was one of the chief architects, comprehensively failed when the credit crunch came along. A lack of clear accountability created real confusion and, instead of seeing an overlap of competing powers—the usual challenge that occurs in bureaucracies—we saw what my hon. Friend the Member for Warrington South (David Mowat) described as an “underlap”, a potent power vacuum. The Bill rightly seeks to address that problem.

Even before the credit crunch began in earnest, Dr Willem Buiter, a former member of the Monetary Policy Committee, raised his concerns with the Treasury Committee in 2007. He said that the tripartite system was “risky”. He went on:

“It is possible, if you are lucky, to manage it, but it is an invitation to disaster, to delay, and to wrong decisions.”

Sadly, Dr Buiter’s concerns fell on deaf ears. The previous Government failed to heed such warnings and, just a few years later, they were completely unprepared to cope with the credit crunch. It has been left to this Government to clean up the mess, and to put in place a framework for financial stability that will work through the financial cycles. The Bill will play a critical role in that task.

The Bill will move the British financial services sector on from the failed model of the past and, most importantly, seek to address the issue of accountability that was so confused under the previous arrangements. The new framework addresses the key flaw in the old system by putting the accountability back where it belongs—to the Bank of England. Just as the Bill has a clear focus on monetary policy through the Monetary Policy Committee, it will provide a clear focus on financial stability through the Financial Policy Committee. Its job will be to monitor the overall risk in the financial system, to spot dangerous trends and to stop excessive levels of leverage before it is too late. The creation of the FPC is a vital step on from the previous system.

I also welcome the Chancellor’s announcement today about the new oversight committee. The Bank of England will continue to be accountable to Parliament, and the

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Treasury Committee will play an important role in guaranteeing oversight of the Bank’s new powers, about which I know some colleagues have expressed their concerns.

With greater accountability and the right tools for facing a crisis, a clearer and more coherent framework will be in place to create the financial stability for which there is this overarching need. We should not forget, however, the importance of the European Union dimension to this debate. As my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) explained earlier, it is vital not to let the EU tie our hands in regulating Britain’s financial services sectors, and vital, too, for the capital requirements directive, currently making its way through Brussels, to give Britain the flexibility to take a robust approach to financial regulation. Britain should work with interested member states to ensure that any future EU regulation respects the rights of individual member states, including Britain, to set their own terms for financial stability.

The Bill’s structures should be designed to achieve that objective, and I know that the creation of the committee that we have discussed today will be a vital step in this direction. Now is not the time to replace a domestic box-ticking agenda, which was so prevalent in the previous Government’s framework, with an EU one, which would be a further disaster.

In my remaining time, I would like to talk about one of the most damaged parts of the existing system—the Financial Services Authority. Plainly, it is no longer fit for purpose. Even the FSA’s own report on the failure of the Royal Bank of Scotland acknowledged its own woeful capability in meeting its dual obligations of oversight and consumer protection. Clearly, it is time for change.

The new framework will help to create a Prudential Regulation Authority and, most importantly for my remaining remarks, the Financial Conduct Authority. I believe that the FCA will help to protect consumers and drive competition. In the UK today, the big four banks have a staggering 77% of personal current accounts, which illustrates how concentrated market power has become in retail banking. All serious commentators recognise that it is time to instil greater competition in the sector.

The barriers to entry for new entrants have simply been too high for too long. This problem must be tackled; I feel very strongly about it. For several years before I was elected as a Member of Parliament, I led Asda’s move into financial services. In so doing, the company genuinely sought to do something more than just add a new brand to familiar products. It was a very challenging process, and it is good to see relatively new entrants there nowadays, such as Metro Bank, the Co-op, Virgin Money and Tesco, working to do things differently from the established high street banks. There is much more work to be done; it is vital that the FCA encourages activity in this area.

Beyond competition, the FCA will have important powers to protect customers from predatory behaviour. Again, it is vital for the FCA to be involved; it must name and shame the firms that are causing the problems. Without that, customers will not have the confidence in the financial markets that underpins an active, productive and, hopefully, world-beating financial services sector here in the UK.

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In conclusion, I give my support to this critically important legislation. It has been an honour to be involved in scrutinising parts of the Bill in my capacity as a member of the Treasury Committee. I hope that Members of all parties will support it this evening.

9.25 pm

Jackie Doyle-Price (Thurrock) (Con):
It is a great pleasure to have an opportunity to speak in what, in the main, has been a well-informed and thoughtful debate, and I pay tribute to all who have contributed to it. I want to pick up on some of the themes in the Joint Committee report, which my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) has highlighted.

While the proposed structural reforms are welcome, there must also be changes in the culture and behaviour of the regulators and the firms they are dealing with if we are to deliver an appropriate system of financial regulation. We need a change in the regulatory culture and philosophy that will enable regulators to tackle issues as they emerge, rather than after the event.

We also need a culture in which politicians allow the regulators to do their jobs. I will be looking for reassurances from Ministers that they will not interfere with regulators and that regulators will be empowered to do the job given to them in law. As we have seen from the FSA report into RBS, under the last Government politicians were all too keen to tell the FSA to back off from being overly intrusive in its regulation. There can be no accountability if politicians get in the way of regulators doing their jobs as set out in law.

We must also ensure that the new regulators do not fall victim to regulatory capture. There was much criticism of the FSA following the collapse of HBOS and the revelation that a whistleblower had warned about the management of risk within the business. The FSA did write to HBOS and asked that action be taken in response to the issues highlighted by the whistleblower, but clearly the action taken was not sufficient. It might be noted that Sir James Crosby, the former chairman of HBOS, became the deputy chairman of the FSA. There are, of course, advantages in attracting senior practitioners to the boards of the new regulators. As we have discussed, we need people in place who understand the models of business and the financial products. However, we must not allow relationships between firms and the regulator to become too cosy and thereby to prohibit effective challenge.

I particularly welcome the creation of the new Financial Conduct Authority, which gives an opportunity to deliver much stronger protections for consumers. I say that as somebody who used to be a regulator in the consumer division at the FSA and an adviser to the Financial Services Consumer Panel. One of the comments made at the time of the financial crisis was that the FSA had spent too much time looking at conduct issues and not enough time considering prudential issues. In my experience however, it was not particularly good at conduct either. Again, we return to the point about the FSA not being empowered to do its job. It took five years for the FSA to deal with payment protection insurance mis-selling. The industry hired lots of lawyers to argue that there was no regulation to stop what it was doing, leaving the FSA powerless to take action without legal challenge even though it was blatantly obvious that the industry was mis-selling and ripping off consumers.

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In such an environment, the regulator needs real teeth. It also needs the support of politicians and Ministers. It does not need politicians getting in its way; instead, it needs their support. The regulator will never be able to match the legal resources that the amassed banks can mobilise and it will therefore face an unequal fight unless we stand behind it when there is consumer detriment. Ministers need to be prepared to set out what behaviours they consider to be unacceptable. We have talked about naming and shaming. We need to think about how much further we might go in that regard. We might learn from what the Prime Minister did with the energy companies just a few months ago. If we were to give a signal that such behaviour will not be tolerated, that would give the regulator the clout to encourage firms to change their behaviour.

Clearly, that has been absent from our financial services regulatory regime. Instead, we have had an environment where the Prime Minister, the Chancellor and the City Minister were calling for light-touch regulation. That led to pressure on the FSA. We have heard today about the 8,000 rules that led to calls for light-touch regulation, but that focus on rules clouded the issue. What was needed was an environment where the regulator could tackle the risk of consumer detriment within the business it was supervising. We needed fewer rules, not a less active regulator.

That is where we come back to the whole issue of culture and behaviour by the regulator and the firms. We need a regulator that provides an appropriate challenge, and one that can exploit the source of profit in the business model and ensure that institutions treat their customers fairly. We need a regulator that challenges the behaviour of the firm, not its compliance with individual rules, and which will make it clear who is accountable for what in the regulatory system.

Finally, I wish to give my support for the transfer of the regulation of credit to the new Financial Conduct Authority. Consumer debt is probably the biggest cause of detriment to our financial industry and it has always lacked any transparency; it was not clear who was responsible for regulating that. The Office of Fair Trading has been a rather anonymous organisation to the public. As we have heard, the proposal also gives us the opportunity to ensure that the new high-cost lenders can be tackled. We have heard lots of discussion about the need for price regulation and caps, but this is about having responsible lending rules and making sure that a suite of products are offered to fit every consumer’s circumstance. I look forward to engaging in the debate further as the Minister develops those proposals, and I give my wholehearted endorsement to the Bill.

Several hon. Membersrose—

Mr Speaker:
Order. The wind-ups from the Front Benchers begin at 9.40 pm, but before then two remaining Members are seeking to catch my eye, both of whom can be accommodated if they thoughtfully divide the time roughly equally between them.

9.31 pm

Steve Baker (Wycombe) (Con):
Thank you, Mr Speaker. I refer the House to my interest in Cobden Partners, which has been established to help nations solve their banking crises.

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I very much welcome the Bill, which I hope and believe will prove to be the zenith of contemporary thought on bank reform. With due deference to my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), I wish to talk about three potential elephants in the room. First, I wish to make some remarks about accounting, then I wish to discuss the conduct of individuals and liability, and finally I wish to talk about financial stability.

I know that the Minister has heard my views on the international financial reporting standard, but I draw his attention to a letter in yesterday’s Financial Times by Lord Lawson, under the headline “Forget Fred and focus on the real banking scandal”. He stated:

“The auditing of banks’ accounts, however, is fundamentally flawed in itself. The IFRS accounting system itself has proved to be damagingly pro-cyclical, and the ability to pay genuine (and genuinely large) bonuses out of purely paper profits, which are never subsequently realised, is at the heart of both the bonuses that cause such public and political outrage, and the reason why bank management consistently does so well when bank shareholders do so badly.”

Andy Haldane, the executive director for financial stability at the Bank of England, gave a speech in December. I shall not read out all the remarks that I meant to cover, but he concluded by saying that